State-owned PNB has reported fraudulent issuance of Letters of Undertaking (LoUs)/ Foreign Letters of Credit (FLCs) for payments of import bills, amounting to Rs 12,967.86 crore, to the RBI, Minister of State for Finance Shiv Pratap Shukla said in a written reply to the Rajya Sabha.

A letter of credit is an assurance from the bank that if the importer defaults, the bank will pay on his behalf.

Two officials at PNB's Brady House branch in Mumbai issued LoUs without authorisation to firms linked to diamantaires Nirav Modi and his uncle Mehul Choksi.

"Letters of credit and bank guarantees for trade credits may continue to be issued subject to compliance with the regulations".

The Punjab National Bank (PNB) will honour claims by peer banks who issued credit to billionaire jeweller Nirav Modi and his uncle Mehul Choksi against guarantees given by PNB, but the payments come with riders.

After the unearthing of the PNB fraud, an RBI notification last month said: "The risks arising from the potential malicious use of the SWIFT infrastructure has always been a component of their operational risk profile".

During issuance of LoU, there are four parties involved - issuing bank, receiving bank, importer and beneficiary entity overseas. "The instrument (LoU/LoC) is being blamed, taking the focus away from the system failure in PNB", Sanjay Mandavia, an expert on trade finance who arranges buyers credit for SMEs, told The Telegraph.